In his Budget last week Jeremy Hunt announced measures aimed at easing the pain of rising prices. Real incomes have been falling in the UK since late 2021, and inflation is still at its highest for decades. In fact, according to the latest figures from the Office for National Statistics, inflation was up to 10.4 per cent in February, despite predictions that it would fall. How is the government trying to help those hit by spiralling bills? We summarise the Chancellor’s key cost-of-living policies.
Childcare
The headline announcement in the Budget, and widely trailed beforehand, was childcare reform. Chancellor Jeremy Hunt is expanding the 30 free hours of childcare per week to include all children aged nine months to five years old, of parents working 16 hours or more a week – with £4bn to be spent on it. Those on Universal Credit will also receive part of the payment for childcare up front for the first time.
Hunt also pledged money to a pilot scheme that will provide incentives of £600 for people to become childminders, to more free nursery places, and for schools to offer “wraparound care”. The widened free childcare allowance will be phased in by September 2025 to allow providers to scale up provision. Hunt has also relaxed the staff-to-children ratio from one-to-four to one-to-five.
This will mean the recruitment challenges to deliver the policy will be less daunting, but providers have already highlighted potential impacts on safety. There are also concerns around the funding shortfall, as places for three- and four-years-olds are already lacking £2bn a year, according to the IPPR think tank.
The cost of childcare in the UK is more than double the OECD average, attracting a lot of campaigner attention. The government says the measures will allow 60,000 parents to return to work.
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Energy bills
With energy costs still rising and fuel poverty deepening, the government has extended its “energy price guarantee” for a further three months, limiting typical household bills to £2,500 per year until the end of June. Hunt also announced that households using prepayment meters will no longer be charged more for energy than those on direct debits. This is designed to help reduce the poverty premium. While such interventions are urgently needed, they will not address the British public’s long-term exposure to volatile fossil fuel prices. There were no new energy efficiency schemes that would protect bills from future external shocks, and there was no social tariff, which would further discount bills for vulnerable groups.
In terms of energy infrastructure support, £20bn has been allotted to carbon capture storage, and there was a promise of support for new nuclear plants, and especially small modular reactors.
There wasn’t much in the Budget to suggest a net zero economy is imminent, such as planning reform that would promote renewable energy, and support for green skills or heat pumps. Meanwhile, an extended fuel-duty freeze will further incentivise the use of fossil fuels. New announcements on actions to help meet net zero have been promised for later in March.
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Earnings and wages
The Office for Budget Responsibility (OBR) forecasts that real disposable income will fall by 5.7 per cent over the next two years – the biggest drop on record. Despite that, there was nothing in the Budget on public sector pay, which has been subject to several years of real-terms cuts, prompting waves of labour strikes. Although private sector pay has risen, it has not kept up with inflation.
Back-bench disquiet over the UK’s large tax burden was ignored, as Jeremy Hunt kept current levels of taxation in place, with no adjustment to tax bands. Hunt and Rishi Sunak are committed to running a day-to-day budget surplus and borrowing only for capital investment. There are no changes to the minimum wage, which will stay at £10.42 an hour from April.
The Chancellor has raised the annual allowance on pensions by £20,000 to £60,000, increasing the amount a person can contribute without being charged by the Treasury.
The move is part of a range of measures designed to encourage people back into work after more than half a million people, predominantly older workers, have left the jobs market following the pandemic. The measure particularly targets higher earners such as experienced doctors, who have long complained about the “pension tax trap”.
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Inflation
Last year, the UK’s Consumer Price Index (CPI) hit 11.1 per cent, the highest rate since records began in 1997. The CPI, which tracks the changing price of everyday consumer goods, is currently at 10.1 per cent. The OBR has forecast a fall to 2.9 per cent by the end of 2023.
The Chancellor laid out measures to reduce inflation, focusing on energy, fuel and beer. As mentioned in the Energy Bills section, the energy price guarantee will be maintained at £2,500 per year until June, and the government will align charges for people on pre-payment meters with those on direct debits.
Tax on draught beer in pubs will remain frozen from 1 August 2023 to limit rises in the price of a pint. £5bn will also go towards keeping fuel duty at the same level for the next 12 months, including the 5p cut per litre, reducing costs for motorists. A funding boost of £63m will also go to community leisure centres and swimming pools to help them cope with high running costs.
There was no mention of mechanisms to reduce supermarket prices, or mortgage interest rates. However, interest rates are expected to fall as inflation does. The Bank of England base rate, currently at 4 per cent, is predicted to rise to 4.6 per cent by July 2023, before falling over the next five years to around 3.5 per cent.
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Welfare and benefits
Amid the intensifying consensus that Britain’s social safety net is not fit for purpose, the Chancellor announced plans for what he labelled “the biggest change to our welfare system in a decade”.
Work capability assessments (WCAs) will be scrapped and replaced with a voluntary employment scheme for disabled people. The scheme will fund 50,000 places per year to help people “find appropriate jobs and put in place the support they need”. It will be up to a work coach’s discretion as to whether someone is fit or unfit to work.
Tougher sanctions will also be placed on Universal Credit (UC) recipients who fall foul of the rules. Claimants will face a more “intensive” eligibility criteria: they will have to work a minimum of 18 hours a week (three more than currently), with those below this having to meet regularly with a work coach. Additionally, UC financial top-ups for disabled people will no longer be based on capability to work, but be awarded to those already receiving the UC standard allowance, alongside personal independence payment.
While the scrapping of WCAs has been welcomed, policy experts are concerned that stricter employment enforcement measures are not an effective incentive to work. There are worries that they will place more stress on benefit claimants.
This article appeared in the Spotlight special policy supplement on the cost-of-living crisis. To read the full report click here.
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